In some countries, public procurement policies that require governments to procure timber of verified-legal origin have either been introduced or are being developed. Such policies will favour formal enterprises and enable formalized MSMEs to document legal timber origin to participate in public tenders, giving them access to significant market shares. This expands market opportunities for formalized MSMEs. For example, in Cameroon, the manager of an MSME that received FAO support to formalize, reported having won a public tender for timber infrastructure work for the Army in the country’s Eastern region. This expands market opportunities for formalized MSMEs.
Finally, formalization can be a stepping stone towards more lucrative export-oriented supply chains. In Indonesia, the Indonesian Furniture and Handicrafts Association (ASMINDO) helped three groups of MSMEs to receive SVLK certification,²⁰ which resulted in several group members securing clients in Europe and exporting their products abroad for the first time.
2. Increased access to financial and technical support
One of the most commonly cited drivers to formalize is potential access to financial mechanisms, such as credit. While this is difficult to realize, given that even formalized MSMEs may lack the collateral needed to access financing, some countries offer formalized MSMEs access to credit at subsidized rates from state-owned banks, making them more competitive compared to informal enterprises which do not have access to such credit lines and tend to receive credit with much higher interest rates and increased risk of losing their assets in case of default. EFI currently supports a group of tree growers in Lampang, Thailand, to register as a group and access subsidized loans from the Bank for Agriculture and Agricultural Cooperatives using their trees as collateral. To support the operations of MSMEs in Colombia FEDEMADERAS facilitated a meeting between the MSMEs and the financial institutions catering specifically to the forest sector, such as the Banco Agrario and the Fiduciary Society for Agricultural Development. As a result, 43 timber processors learned how to access credit. This access to credit is vital for enabling MSMEs to purchase the equipment they need to improve their efficiency and produce value-added products, ultimately generating more revenue for their business.
In some countries, government institutions offer technical training and subsidies to purchase equipment only to formally registered MSMEs. For example, the Peruvian government’s Center for Technological Innovation of Wood (CITEmadera) provides support programmes only to legally registered enterprises. Although support from donors and international organizations may target both formal and informal MSMEs in efforts to promote local livelihoods and poverty alleviation, due to their legal status, formalized enterprises are more likely to capitalize on such support to increase their competitiveness and profitability. By virtue of being formalized, MSMEs can apply these skills to grow their businesses by engaging in more profitable markets such as those requiring legal or sustainable timber.
3. Protection through the legal system
Informal enterprises do not typically have access to the formal court system. This requires them “to restrict their transactions to the immediate local and to be with those parties with whom they have personal or social ties”.²¹ While these arrangements allow the parties to use informal dispute resolution processes and traditional means of justice, they can be locked out of formal dispute resolution mechanisms and courts.²²
While formalization alone is insufficient to alter the overall operating context of MSMEs and to completely eradicate fraudulent practices, formal enterprises often have a better negotiating position when solicited for informal payments. Legal status can also offer some level of judicial recourse should MSMEs wish to lodge disputes or invoke laws and regulations in their favour. Although most MSMEs lack the expertise and resources needed to pursue these legal routes, membership in associations and federations can provide a pathway through which this legal support is provided.
Legal status can also protect MSMEs from potentially detrimental changes in local frameworks. Even when given a period to achieve compliance, these regulatory changes can still affect their continued capacity to operate. In some countries where governments have strengthened controls over forest sector businesses, unregistered MSMEs may have been spared forced closures if they had formalized before the policy change.